"Wherefore We must interrupt a silence which it would be criminal to prolong, that We may point out...as they really are, men who are badly disguised." Pope St. Pius X, September 8, 1907, Pascendi Dominici Gregis


Tuesday, February 22, 2011

2012: An Un-cheery Consensus


Why?

We’re pushed to the limit. Indebtedness in all parts of the economy is at or near record highs, most especially for the remaining sector that continues on a binge, the government.  Interest rates are at or near their absolute limit. They literally cannot go below 0%. Already, even with record indebtedness and non-decreasable interest rates, cracks are seen in the consumer economy: housing prices continue to fall, Borders just filed for bankruptcy, Barnes and Noble is on the edge. Can you imagine what happens if interest rates move up? Can you imagine when the inflation we’ve pumped into emerging markets and commodities finally comes home (ok, so American wages might not increase, but foreigners’ will, and who makes most of the stuff we consume?)? Can you imagine what kind of effect an even slight decrease in government fiscal stimulus would have on a teetering economy? Can you imagine what even a slight bump in interest rates would do? We will within the next two years face an unimproved economy moving back towards recession. At this point, our policymakers will have to decide whether to finally allow an all-out bust and restructuring of the economy, or to follow their bail-out, paper-over policy to its ultimate logical conclusion: hyperinflation. They will pick the later.

Why?

I’m fond of asking the following series of simple questions:  

What kind of monetary policy favors debtors?

Inflation.

Who is the biggest debtor in the world?

The US government.

Who sets monetary policy?

The US government.

What kind of monetary policy do you think we’ll have?

And one more key point: The last time the Fed increased interest rates to a ridiculous level to get us out of an inflationary death spiral, the majority holders of US debt were Americans. Today, they are foreigners.

I’ve thought this before: If you really think about it, the US government has pursued an ingeniously rational course of action from their perspective. Having a monopoly on the creation of the world reserve currency, the dollar, it makes perfect sense to trade ultimately worthless paper dollars for oil and manufactured goods. Hell, who wouldn’t fund generous domestic welfare policies and conserve domestic oil supplies, if you can get foreigners to provide these things to you essentially for free?  And this is exactly the policy the US has pursued since Nixon went off the gold-standard in 1971. The only problem is the tab is finally coming due. That’s why and when we’ll bail.

Like Lindsey Williams indicates, we will stiff our creditors. The debt level is too high to work our way out of it.  We will default by printing dollars. Treasuries will become worthless and because there are so many outstanding in independent actors’ hands, this will happen drastically in short order.

There would be absolutely nothing surprising about a dollar collapse in 2012. The only surprising thing would be if it didn’t happen. Lindsey Williams has been right in the past. There’s no reason not to prepare for this. Middle East contagion ultimately fueled by the loose monetary policy of the Fed can easily snowball into the American Empire’s equivalent of 1989.

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